Export controls and innovation transfer within Chinese business groups: Evidence from the U.S. entity list

Abstract

This paper investigates the positive effect of U.S. export controls on the innovation performance of firms in Chinese business groups. Using annual microdata from 2010 to 2022, we analyze how firms indirectly affected by the U.S. entity list respond to these shocks. The positive effect of export controls on innovation performance is evident when indirectly shocked firms are peers of the blacklisted firms and becomes even more pronounced when they are upstream of the blacklisted firms, driven by the need for suppliers to initiate their own innovations. Additionally, we find that both capital and talent within the group are reallocated to these indirectly affected firms following the sanctions. These findings suggest that business groups serve as an internal innovation market, where innovation transfer occurs through inter-firm industrial interaction and resource reallocation. However, the shocks show no significant effect on the innovation performance of the group as a whole, rejecting the hypothesis of overall innovation enhancement. Further analysis reveals that export controls significantly improve firms' productivity, illustrating positive spillover effects on product markets. Overall, this study reveals that export controls drive innovation transfer within Chinese business groups and accelerate technological decoupling from the United States.